Your vacation home may need some help. The great recession we have been hearing about is here. The stock market became a bear market today. Your real estate investment was a good decision at the time but economic conditions have changed the business model.
Time to consider the worst-case scenario. You may need to earn rental income to help make those monthly payments. It may be the right time to join other short-term rentals available for vacationers or rent on a long-term basis.
If the recession hit you hard and you are having trouble with cash flow there are basically four choices. Hold on to the property until tough times are over for you financially, consider using it as a vacation rental, convert to a long-term rental or sell it. The slowdown of the real estate market is causing real estate prices to decline. If you have good equity in your property now is the time to sell if that is what you want to do.
Try to recession-proof your vacation property
Owning real estate is a good hedge against economic recession. Renting your property may be a good move depending upon the location of your vacation home. We have learned many things from the recession of the late 2000s. One primary thing was not to panic. The real estate industry will weather this economic downturn and come out of it stronger. While real estate is not an entirely recession-proof investment, it beats the stock market and other forms of investment during market downturns.
Vacation rentals will be in demand and vacancy rates will vary depending upon the location of the property. The best locations will of course earn more and possibly cover most operating costs. More second homes will be used as rental properties so that will add to the competition but some income is better than no income if you need the money. The good news is that property values will recover when economic activity picks up and it will as it always has.
I have noticed this time around (compared to the 2000s), fewer people have been traveling this year than last. Occupancy rates are dropping at many vacation rentals. I believe that the reduced vacation activity is part of the rebalancing because of the COVID lockdowns. A lot of people rented vacation homes during the past two years as an escape from urban areas. There was a limited supply of vacation homes in many markets one year ago. That has changed as more vacation homes were purchased and put on the rental market.
New opportunities to acquire vacation homes
Investment opportunities will increase as more vacation homeowners sell their properties. Home prices will decrease a bit during this sell-off in key vacation areas where there was overbuying at the end of COVID. The housing market was hot for the past two years, the highest increase since 1965. Real estate investors are still looking to buy that “deal”. If you are selling your property, it’s a matter of time before your selling price attracts an investor.
Vacation property owners should consider using a property manager when they put their property on the short-term market. An interesting thing is occurring now. Rental property owners are benefiting from having managers because the managers are looking after the property. Even when market conditions are indicating depressed demand for short-term rentals, property managers are paid on a commission basis so they are working for little or no income. The best way to protect your property when you are away is to turn it over to a property manager.
Many people purchased single-family homes for use as a short-term rental properties in the last year. They purchased the property at what is now the top of the market because of their lack of due diligence. These first-time investors have in some cases been hit hard. They were trying to ride the wave of getting on the ground floor of short-term rentals and have been hit hard by lower occupancy and higher interest rates.
Time to pay close attention to your capital requirements
This has been a perfect storm for many of those investors who in marked contrast to the early adopters who bought a few years ago are suffering from the weight of mortgage payments.
With the Federal Reserve on a tear to raise interest rates, they have succeeded in driving out many would-be investors from buying vacation homes now. Investors must pay close attention to their capital requirements making sure they have sufficient reserves to weather the storm. The good news is that home values always recover.
I recommend to my investor clients that they analyze potential properties that can be used as long-term rentals if the short-term business is slow. Long-term rentals provide a steady income and rent rates are still climbing. In the long run, vacation rental properties will usually yield higher net income.
Bargains will come to the market
There are many low-supply locations that may be the best places to buy a residential rental property. This may be the best time to buy multifamily properties. Risk is mitigated by several units. If those multifamily properties are located in a vacation area, even better. People need to live somewhere and rental units are still in short supply.
This is a good time to snag a bargain as desperate people put their vacation properties on the market. Just be sure you are not as desperate to buy one for more than the market price. I strongly suggest you work with a real estate agent who knows the market.
Anytime is a great time to buy real estate, many people have become wealthy buying real estate during depressions, recessions, and other economic downturns. There has been a strong demand for rental property for the last 10 years. Even with more being built, there are not enough. The recession will now cause more people to need rental property since some can not afford to buy a house due to rising interest rates.
Consider renting your vacation home long term
Finally, rents have been going up to match the increasing cost of maintaining rental properties. Insurance rates have gone up in some areas by over $1,000 per year, some two years in a row. Property taxes are up, and utility costs have risen as well. One of the biggest costs is building materials for repairs. Contractor labor rates have been on the rise as well. With higher rents, investors can start looking at properties even with high-interest rates as potential investments.
As you can tell from this article, there are many moving parts to talk about. Vacation rentals which are still a good investment may not yield what they were before the downturn this year. Investors can make money with good investments and prudent management but not as much as in the last few years.
I am one of those people who believe it’s time to take a new look at real estate investments understanding that at least for short-term rentals, this business will come back. A normal industry may return as early as next year depending in part on where the economy stands at the end of the year.
If you can weather the impending downturn you will come out better off
Many people plan their vacations for spring and summer as early as December but by the end of February, there will be an indication of how next year will end up. The space has become somewhat saturated but that will be corrected as some vacation rental properties are sold as primary residences. Investors who have weathered the storm will come out stronger.
People will take vacations, they have always taken vacations and will continue to do so. Business travelers however are fewer and vacation rentals that have relied on this group may have to reassess their marketing plans.
I know that some investors focus on visiting nurses which is a good market in some areas and should continue to be. Investors must pay attention to larger social trends. The cruise industry was gutted this past few years and it almost certainly contributed to more vacation rentals. When this industry recovers, they will pull would-be vacation renters to their venues. Travel to Europe and for that matter within the U.S. via air was curtailed during the past few years.
People’s spending patterns have changed from flight to auto
Most of the guests at vacation rentals on the Mississippi Gulf Coast arrived by auto even from as far as Washington State. There was so much turmoil with flights and COVID issues that many people decided to drive. When the airline industry stabilizes, this may pull some people from vacation rentals. This may already be happening.
There are some suggestions that I would like to pass along. One is for investors who are considering what type of property to buy. Think of a larger property e.g. three bedrooms. Why? Birthday parties, wedding parties, events. People love to jam into a property not only to save money but for close contact. Many of my properties which are almost all larger are still being rented for these types of activities.
As an example, a woman rented a three-bedroom house and used it for her life coaching sessions. She travels to different locations and her clients come to the vacation rental where she works with them. This person liked the large tree-covered yard and spacious house to work in.
You must pay attention to marketing your property
Often my properties are rented by business groups where they can use the kitchen table and high-speed internet to work away from the office. I know that I mentioned above that business travel is lower but it is not nonexistent. If you market your property to attract these types of groups you can fill in some major gaps in slower months.
This brings me to another topic and that is the marketing of your property. Don’t just keep lowering your price. That will not drag people to your property. Some of our clients have asked us to try this and it does not work. Why? Those few properties that have lowered their prices and seem to be booked all of the time have been on the market for years. Or, they have a hook, some marketing method that is not readily noticed with a casual look at Airbnb.
Some investors on the Mississippi Gulf Coast rent to Air Force members who come to the local base for the school. They have the option of renting a vacation rental and being reimbursed. I know one investor who made big dollars doing this until COVID then the Air Force changed their entire program. She was forced to sell her properties because she needed the income to live on and it dried up.
Do you tell your Facebook friends about your vacation rental?
Every rental market is different and there are no perfect solutions to the current slowdown except to understand that people are still renting vacation properties. This means you need to grab those guests for your property. Take a hard look at the comments left at 3rd party sites. Can you use any comments to improve your property?
What about developing a strategy to acquire more guests during the slow periods e.g. a local company that brings in executives for short periods? As business owners, you need to look at your property as a business. Business plans are a great way to strategize on ways to attract new guests.
What about your social media? Are you putting it out there that you have a property for rent? It surprises me how many people have Facebook and do not advertise their property to their large number of friends. Linkedin, Youtube, and all of the other social media that you are connected to should be used. Grab your listing from Airbnb and paste it into Facebook.
Don’t think lowering the price will have them running for your property
Back to price. Try not to chase your prices down. If you were getting bookings this past year and things have slowed down, it’s not the price. It seems that the lower occupancy issues that you are experiencing are a national trend. It’s probably not that people can’t afford to stay at your property, it’s that they are not leaving home now for a variety of reasons not the least of which is high prices for everything and perhaps their job is at risk.
All investors must be prepared for the worst of the FED’s work which has yet to work itself through the economy. The ultimate goal is to reduce employment so people stop buying and the demand side shrinks. This means fewer workers in the workforce.
Many people stopped working during COVID, the main reason for the labor shortage. One spouse was making enough so the other stayed home. That’s ok until the only working spouse loses their job through downsizing which is coming.
People will forgo vacations if they have no job or the economic pressure is high. This is one key reason that your property must be marketed properly. People will still vacation, and many millions will vacation. You need to get your share from a shrinking pool and it can be done.
Don’t forget as an investor you may want to flip your property over to a long-term rental if you can not earn enough with your short-term business. You can eliminate the potentially higher risk of property ownership if you accumulate a rainy day fund. Make sure you are in a good place financially. I have explained in blogs over the years that cash is king.
Work with your property manager on a plan to improve your income
You should work with your property manager to develop a plan for the future of your property. The same manner who has taken care of your vacation rental can also probably rent your property on a long-term basis if necessary. I can speak from experience that good property managers work with other property managers in the local area. Communication is essential to compare notes about the market.
Property managers usually know when the market is great, good, or so-so. When their properties do well, most of the others in the area do well. She same is true for a downturn or slowdown. This networking is essential so they can communicate to their clients what is going on. Some owners may think that it’s their property or their property manager when slower traffic may be an area and region-wide issue.
If you do not have a property manager, it may be time to get one. Remember as I mentioned above, these managers work on a commission. When times are tough, they are working for little reward except for the knowledge that things will turn around in the future. FYI, your insurance company may step in to cancel your policy if your property is not being managed when you don’t live in it. I fully expect to see this be a trend for a while.
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